Research exposes wide variation in estimates of pension fund shortfalls

Estimates of pension scheme liabilities in the UK’s largest companies vary by about 20%, depending on the assumed life expectancy of members, according to new research.

The analysis of 28 of the FTSE 100 companies – representing 49% of its total market capitalisation – by Mercer Human Resource Consulting, found that more than half provided information on the mortality rates used last year.

Analysis of the companies’ policies on the presumed life expectancy of staff showed that most assumed life expectancies for a 65 year-old ranged between 18 and 22 years. The lower the life expectancy assumption used, the lower the value of a scheme’s liabilities will be.

Tim Keogh, worldwide partner at Mercer, said that given the social and geographic differences in memberships, pension schemes would be expected to use a range of mortality assumptions.

“But those schemes that use particularly low assumptions may come under increasing pressure to justify their positions,” he warned.

Estimates of the deficit facing the pensions schemes of the UK’s biggest companies have varied wildly over the past year since the issue was thrust into the limelight by the findings of the pensions commission. and the decisions by increasing number of firms to close final salary schemes.

But the total deficit for final salary pension plans of FTSE 100 companies has halved in the past two months, according to professional services firm Deloitte.

It now stands at £60bn – largely due to the recent gains from a buoyant equity market and an easing of the pressure in bond markets following government proposals to lend over longer periods, it said.